Option to treat income as exempt

(Clauses 4, 10 and 19)

Summary of proposed amendment

The proposed new rules will enable owners with low amounts of income, or losses incurred from the asset, to treat the income as exempt.

Application date

The amendment will apply from the beginning of the 2013–14 income year.

Key features

New section DG 21 will enable owners whose gross income from the asset in an income year is less than $1,000 to choose to treat the income earned from the asset as exempt income. The owner will not be taxed on any income earned from the asset and cannot claim a deduction for expenses that are incurred in earning that income.

Owners who incur a loss from the asset can also choose to treat the income earned from the asset as exempt income.

When the mixed-use asset is owned by a company and the company chooses to treat the income earned from the asset as exempt, a deduction will be denied for interest expenditure incurred by shareholders and other group companies identified under sections DG 11, DG 12, DG 13 and DG 14.

No formal election or notification process is proposed. Asset owners can choose this approach by omitting the income and the relevant deductions from their tax calculations. However, asset owners must keep sufficient records to be able to verify that they are entitled to apply the section.

Background

New section DG 21 is designed to address compliance costs. If the potential tax revenue generated by the asset is very small, it is not considered cost effective to require asset owners to file returns and to have Inland Revenue process them.

To further reduce compliance costs owners that expect to systematically make tax losses that are quarantined under the rules can opt out of the rules.